“Digital transformation” has been on the lips of nearly every CEO at some point in the last ten years, and even more frequently in the last five. According to Forrester, 68% of global business leaders list digital transformation as a top priority for their business. Only 3% of retailers have actually completed a digital transformation project, according to a study by Oxford Economics.
Digital transformation is becoming a higher priority for three big reasons. One, the consumerization of technology has changed the game for how technology is developed and deployed. When Facebook or Twitter rolls out a new user experience every month or every quarter, consumers expect the same thing from how they interact with retailers.
Two, the speed of technology change has been unrelenting. Consumers carry around more technology in their pockets than most retail stores had to ring sales not that long ago—and those devices get more powerful every year. For an industry that hates change, especially when “cheaper/better/faster” is the ante to stay in the game rather than something that delivers direct top- or bottom-line benefits, then it’s hard to marshal the commitment to keep up. It’s especially difficult in an industry famous for its very tight profit margins.
Three, rising consumer expectations have far outstripped retailers’ ability to keep up. When consumers expect you to engage with them on Facebook—except, wait, Facebook is passé. Now it’s all about Instagram, except that Snapchat is cooler. Until it isn’t, and we’re back to Instagram… For retailers who want their tech-enabled experiences to be “perfect” as soon as they hit the market, this whipsaw level of change – over a period of months instead of years – is exhausting. Retailers don’t want to let go of “perfect”—they find it incredibly difficult to be vulnerable with consumers in that way. But trying to keep up with how fast consumers move and also deliver a perfect customer experience are simply incompatible.
Retail’s not alone. Every business in every industry is getting hit with these demands in one form or another. The response of all businesses has been to embrace the idea of “digital transformation.” Wikipedia breaks this down in a pretty simple way: innovative change that is beyond enhancing or supporting traditional methods of doing business (the transformation part), and the application of digital technologies to achieve innovative change.
However, there has been a lot of resistance to fully embracing digital transformation in retail. There are a lot of reasons for this.
The most basic one comes back to the rise of e-commerce. For retail, e-commerce was the first digital technology that kicked off the need for digital transformation. And retailers started out in e-commerce by doing it all wrong. They weren’t sure if it was a fad or going to be some lasting thing, so most retailers who started down the road of adopting e-commerce did so far outside the normal processes of the enterprise. Some retailers, like Walmart, even went so far as to establish an e-commerce group in a completely separate part of the country from their corporate headquarters. For most retailers, e-commerce was set up so far outside the enterprise that most of their struggle through the ‘00s and continuing through today has been about trying to bring their “digital stores” back inside the regular part of the business.
Another reason why digital transformation is so hard for retailers is because they are traditionally technology laggards. Technology, outside of e-commerce, has always been a cost to be managed, rather than an enabler to be invested in. Even for retailers who have come around to the idea that technology is central to digital transformation are stuck with decades of legacy technology investments where it was a cost to be managed—and retailers are very good at being very cheap. It’s not extreme to say that approximately 0% of retailers’ current technology portfolio is capable of enabling digital transformation without some significant investments.
However, to be fair, retailers operate in a very complex technology environment. Retail is highly distributed, with most retailers of any scale having hundreds of locations and tens of thousands of items. Those locations—stores—are spread across geographies, creating a highly variable physical and digital environment. Urban stores, rural stores, stores in different countries with different telecoms infrastructures… Managing that highly variable environment is not easy. Throw in the last twenty years of hackers and payment security challenges, and it’s easy to start to wonder why anyone would want to be in retail to begin with.
Because of that distributed tech environment, data has been challenging and expensive to manage, and retailers’ expectations about managing data have been hard to alter over time. Too many retailers, even today, believe that all they need to know to be successful is how much they sold last year, last month, last week, or even yesterday. All that rigmarole about customer preferences and social media sentiment etc., for these retailers, is just noise. But part of the reason they feel that way is because it was already a case of moving heaven and earth just to get a solid, accurate view of what was sold. The idea of adding in thousands of attributes and new ways of considering the interaction of customer, product, and location becomes overwhelming unless one also considers the application of new computing power and technology solutions to make all that data manageable.
Retail’s Fundamental Challenge
At some point, this can all sound like a lot of excuses for why retail hasn’t jumped right in to digital transformation. The reality is, it doesn’t matter why retailers haven’t changed—it only matters if they ever get around to changing. That’s the heart of the retail apocalypse freak-out that has engulfed so much retail coverage today. Vulnerable retailers—those that are loaded up with debt and can’t afford to invest in new technology and new ways of doing business—are getting picked off early.
Next will come those retailers that made some changes, but didn’t invest in digital transformation for real. What do I mean by that? I mean retailers who made surface-level changes to their business, like enabling things like click and collect, without addressing the underlying organization, process, and technology challenges. These are the retailers who still treat the e-commerce site as “just a big store” for buying purposes, without understanding the interplay between product lifecycle and channel. Or the retailers who say things like “my customers don’t care anything about product information beyond price.” Whether it’s non-GMO or Made in America, increasingly, all customers care something more about products than just price – and that’s not just a fad.
Finally, the retailers who try for transformative change and fail will come next. Macy’s was almost one of those – they made a lot of progress, floundered, and may now be getting back on track. But “getting back on track” has entailed selling off a lot of real estate in order to finance big investments in the business, including acquiring Bluemercury and subsequently completely redesigning the retailer’s beauty business. And they’re still not out of the woods.
It’s Not A Retail Apocalypse
The death of retail is completely premature. Last I checked, a few of my neighbors have decided to try raising a few chickens (coyote snacks, is how that will most likely turn out). But none have gone into weaving their own cloth to make their own clothes, and none of them have yards large enough to support personal farming. It’s a basic of modern economics that specialization unlocks a lot more value than everyone fending for themselves, and barring a real apocalypse, I don’t see us returning to that. That means retail is here to stay.
Digitally transformed retail, however – that’s another thing entirely. I’ll be exploring that topic a lot more this year, so stay tuned.
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